The bewildering range of retail and institutional funds available to investors in Europe is more than just a marketing problem.

A think-tank of fund managers and trade associations estimates this fragmentation costs investors €6bn ($7.7bn) a year in excess fees and lost performance each year, and will this week publish a study calling for consolidation. The group, which includes the UK’s Investment Management Association, the Dublin mutual fund association and Assogestioni, the Italian funds organisation, aims to find ways to reduce the number of funds being sold in Europe.
The European investment funds market has two thirds of the assets of the US market but more than three times as many funds. This results in smaller asset pools and higher fees as a result of increased transaction, operation and administration costs.
The European Commission, which is examining the problem under amendments to Ucits III, the cross-border fund sales rules, estimates investors are charged €2bn to €6bn more in annual fees than they would be if scale could be exploited. Fund performance, it says, could be improved by five to 15 basis points per annum as a result of merging existing funds.
However, the commission has proposed to legislate for any changes via a European directive, which the think-tank members say could take up to five years to implement.
Industry participants in the study group include US fund manager Invesco, custodian JP Morgan Investor Services and accountancy groups PwC and Deloitte.
Jean-Baptiste de Franssu, chief executive for continental Europe at Invesco, one of the principal players in the group, said: “We have six or seven domiciles for our funds in Europe and there are competitors with up to 17 domiciles. This is absurd in terms of cost efficiencies.”
Fund managers with interest in reducing the number of domiciles include the asset management arms of Deutsche Bank, ABN Amro and Axa.
De Franssu said: “The commission’s expert group has done a great job in looking at it but it says we need a directive to resolve things. We say we cannot wait five to seven years for a directive. The purpose is to see what we can do in the interim.”
The EC recently reported there were 4,933 funds in Europe with less than €10m in assets. A further 14,000 funds, or 54% of the market, have less than €50m in assets.
The continuing trend for mergers of European asset management companies is only likely to increase the duplication.
Fund managers have tried various techniques to reduce their fund ranges. One option has been to transfer the net assets of a smaller fund to another then close the first fund when its liabilities have been discharged.
Alternatively, fund managers have re-domiciled funds to centres such as Luxembourg and France where it is easier to perform domestic mergers on their funds.
Both techniques can be costly, time-consuming and run into significant tax difficulties.
De Franssu believes there is a lot at stake if European-based companies cannot reduce fund ranges quickly, including a greater threat from US funds groups benefiting from domestic merger legislation with their US registered funds.
“There is the potential for polarised competition between US mutual funds and Ucits registered funds on a global scale. We’ve seen the enormous pressure on pricing in the US mutual fund industry. There is no reason why this sort of global competition, with local variations, might not come,” he said.
De Franssu said the think-tank’s proposals to rationalise fund domiciles were not going to lead to a sudden consolidation of assets by fund managers into one fund. But, he believed they could cut in half the number of funds being sold.
The study group’s aims, however, could be hampered by local mutual fund associations looking at cross-border mergers with trepidation, fearing it may negatively affect volumes of funds business in their markets.
The European funds market has experienced a drift of fund registrations to Dublin and Luxembourg, where regulation and costs are less stringent.
De Franssu acknowledges the co-operation of local regulators and mutual fund associations is central to the success of its proposals. Both will be top of the report’s list of recipients.